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PICC is an American company that has specialized in various products in nursing. The company has managed steady financial growth despite problems in the economies within which it operates. This can be attributed to the dependency of other companies on their products. The major method of growth has been by mergers and acquisitions.
The company’s financial ratios have been compared with industry statistics in this report. The company is seen to perform well in its industry. It also has good growth prospects as portrayed by the Pro-forma financial statements and ratio analysis. We conclude that PICC is a worthy company in which to invest.
Initial Pro-Forma Financial Statements
These financial statements predict the future position and performance of PICC based on the historical financials and some assumptions of growth. In this case, the growth rate for the year 2013 is assumed to be 15% while that of 2012 is assumed 20 %.
Determination of the Cost of Debt
Debt capital refers to what a company has borrowed to help finance its investments. In the case of PICC, for the year 2012, it is the $ 2,253,500 shown on the balance sheet under long-term debt. Debt issuers expect returns in the form of interest. This is the charge to the company for using their funds. Interest is quoted in percentage form.
Determination of the Cost of Equity
The cost of equity refers to the returns expected by the owners of a company. Shareholders are the owners of the company and they expect compensation for providing capital. Compensation is usually in the form of dividends. PICC shows stockholders’ equity of $ 974,000 on its Statement of Financial Position for the year 2012.
Discounted Cash Flow Assumptions
DCF is one of the methods used to estimate whether or not an investment is worthy. This method takes into account the money that will be available to investors in the future from the specific investment. PICC Company can be valued using DCF. Dividends are considered as the free cash flow that will be obtained by an investor. The growth rate of these dividends is also useful in DCF valuation. The cash flow obtained is adjusted for the effect of time on money.
Internal Rate of Return
IRR is an interest rate. The cash inflows from a project will exactly equal the cash outflows at this interest rate. It is used in investment decisions to eliminate undesirable projects. Projects with higher IRR are considered more desirable. Investors compare the IRR with the cost of capital. An acceptable project should have an IRR higher than the set cost of capital.
Net Present Value
This is a method of investment appraisal that considers both cash inflows and outflows of a project. The difference between the inflows and outflows at their present values is the NPV. Projects with positive NPV are desirable as this implies that investors will gain from engaging in them. Projects with negative NPV suggest that investors will lose the amount equal to NPV if they were to engage in the projects.
Cash Inflow Determination
The cash inflow in a project is usually taken to be the revenue received from the project’s customers.
Top management approves investments after careful consideration of different risk analyses. This helps to reduce the chances of losing investors’ money.